The old-school thinking on vendors was to have as few as possible, which seemed to have some logical reasons, but we’d like to provide some strong counter arguments as to why having a selection of strong vendors is the best way forward.
Financial institutions are generally a risk averse bunch, every decision needs to be weighed, risk vs return. Multiple departments can be involved - Compliance, Information Security, IT, Legal, Procurement and of course “The Business” (whichever team that may be). Only “The Business” sees a return, other teams only see risk.
Every team has their own lens on how they view risk, which makes the process of adding new vendors or licensing new products from existing vendors quite a laborious process in financial institutions of any size.
Advantages of Fewer Vendors
Less Time & Spend on Legal
Theory: With fewer vendors there will be fewer legal agreements to review and sign.
Reality: Generally the vendor T&Cs will be relatively trivial and the meat of the agreement will lie in the separate agreement for each licensed product.
Less Time on Due Diligence (DD)
Theory: As with legal matters, there should be less time spent on due diligence.
Reality: While this might be partly true about DD done on the vendor, I would argue that the DD on a product by product basis remains exactly the same as with multiple vendors. The due diligence required on a low value investor relations service will be completely different to the due diligence required when onboarding a compliance monitoring platform.
Integrating Systems from Different Vendors is Difficult
Theory: Getting data from one vendor’s system into another vendor’s can be difficult
Reality: The theory is not always true in practice, sometimes it can be equally tough to get two products from the same vendor to work properly together, especially if the vendor’s product suite has been a by-product of an M&A strategy.
In this modern, native cloud-based age more and more companies are integrating via APIs and open data standards, meaning that different systems can natively talk to each other with little to no work.
Advantages of More Select Vendors
Best of Breed
The phrase “Jack of all trades, master of none” is as old as the hills and is still true. It is impossible for one vendor to be amazing at everything, a few things perhaps, but not more. But choosing a vendor who specialises in a few things will ensure that you get the best expertise and service possible.
Investment management is all about diversification, so it would seem odd that the received wisdom is to have all eggs in a few vendor baskets. With one or two vendors, if they run into financial problems or get acquired etc. you have a significant portion of your processes at risk. With multiple vendors, one vendor running into difficulties will pose a smaller problem.
Less Vendor Leverage
Similar to risk diversification, if one vendor supports all your investment processes then their leverage over your business will be large. What would you do if they proposed a 20% price increase? Could you replace them easily? Beware of having quasi vendor monopolies in your processes.
It is quite clear that there are arguments either way and that there is no one-size-fits-all answer. Ensure you are aware of the risks and benefits every time you engage a new vendor or have to weigh up the decision of procuring a new product from an existing vendor or a new vendor.
On a final note, look to vendors who are part of an ecosystem of trusted vendors. They will be able to provide you with an end-to-end solution with none of the downsides of being locked in to one single vendor.
FundApps believes strongly to fulfil stringent compliance requirements that only a best-of-breed solution is fit for purpose. To find out more about FundApps and its services click here, to see which partners we work closely with, click here.